SOLE TRADER - Business Studies



SOLE TRADER

This is the most common form of ownership and is the simplest to set up.

A sole trader is a business that one person owns, controls and finances. The main sources of finance are own savings, borrowing from friends and family and borrowing from a bank. The owner receives all of the profits and is solely responsible for success or failure.

Examples might include a window cleaner, self employed electrician, a hairdresser a corner shop or a dog grooming business.

|Advantages |Disadvantages |

|Owners keep all the profits (not shared) |Unlimited libility – this means that if the business went |

|Small in size means only a small amount of start up capital is |bankrupt rge owner is personally responsible. Their personal |

|needed |possessions may be sold to repay their business debt. |

|Easy to set up since no documents are needed |Limited source of funds |

|Owner has sole control so decisions can be made quickly |Owner has to work for long hours (no one to share the work load|

|Personal service can be offered to customers |and ideas with) |

|Business affairs can be kept private |Sole responsibility for the success of the business |

| |The owner needs to have a wide range of skills. |

PARTNERSHIPS

This is also a fairly simple form of business ownership

The partner ship is owned and controlled by between 2 and 20 people.

There are no formal documents needed but because people fall out it is advisable to have a Partnership Agreement drawn up by a solicitor. This will cover things like:

ڤ How much of the profits each partner gets.

ڤ The ruling for taking on new partners

ڤ What happens if a partner wants to leave or dies?

ڤ How are decisions taken which affect the partnership?

|Advantages |Disadvantages |

|More capital can be raised from taking on new partners |Unlimited liability (except sleeping partners) |

|Partners can specialise in the areas that they do best eg |Disagreements can slow decision making |

|marketing or accounts |Limitations on the number of partners and therefore the amount |

|Responsibilities and decisions are spread amongst the partners |of capital |

|Financial information can be kept private |The partnership most be reformed if a partner leaves or dies |

|New skills and fresh ideas are introduced with new partners. |If one partner takes a decision the other partners are equally |

| |responsible even through they may not have known of the |

| |decision. |

NOTE WELL

It is important to note that a partnership like a sole trader has unlimited liability.

However, partnerships can raise money by taking on a sleeping or dormant partner. The sleeping partner invests money in the partnership and receives a share in the profits but does not have an active role in the day to day running of the business.

Sleeping partners have limited liability. This means that if the business went bankrupt the sleeping partners can only lose the money that they have invested in the business, but not their personal possessions.

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